Indonesia ends negative trend in foreign investment in 2020

According to the Indonesian Investment Authority BKPM, the archipelago raised US$28.7 billion in foreign investment in 2020. That is an increase of half of a billion US dollars (IDR 7.1 trillion) over the previous year. The record value of $32.1 billion, however, dates back to 2017.

The current figures reflect at best a rough trend because, according to those in the know, the recording of inflows is often imprecise and with a considerable delay. The conversion according to the exchange rates on which the respective national budget is based also leads to distortions. The differences to UNCTAD's foreign investment figures for Indonesia are often substantial.

The most important country of origin of the FDI is by far Singapore, through which not only many Chinese, but also Western companies direct their funds into the archipelago. Almost two-thirds of all FDI come from the city-state as well as Hong Kong and China.

The importance of the countries outside Asia continues to decline. Only the Netherlands, the USA and Australia are among the top ten FDI countries of origin. In 2020, inflows worth only $144 million came from Germany, corresponding to almost 0.5 percent of all funds. Germany has traditionally played the role of a technology supplier rather than an investor. 

Construction of ore smelters is progressing 

The sectors broadly defined by BKPM only allow a rough allocation of foreign investments. One of the most important fields is likely to be the construction of smelting plants for processing ore. Indonesia has imposed an export ban on unprocessed ores (against which the EU is fighting against through the World Trade Organization WTO) in order to keep more added value in the country.

According to the Ministry of Energy and Mineral Resources (ESDM), a total of 19 melting plants were completed in 2020. Of these, 13 projects process nickel, which is an important component for batteries in electric cars. A further 34 projects are to follow by 2024. The ministry specifies an investment amount of $21.6 billion for the total of 53 plants. Chinese companies are particularly active in the construction of smelting plants in the archipelago.

About two thirds of the direct investments from Germany were spread across the broadly defined sectors of mechanical engineering, electronics, medical technology, measurement and control technology as well as motor vehicles, transport equipment and mining. 

Hope through investment law reform 

In relation to its economic strength, Indonesia has too little foreign investment compared to other ASEAN countries. Increased solicitation has a higher political priority. After all, the island nation wants to be an industrialized country in 2045. Above all, manufacturing companies for whom China has become too expensive or companies that want to diversify their production regionally should find a new home in the archipelago. 

But that requires more manufacturing industry. However, their share in economic output has been declining for many years, and a considerable part of it consists of inexpensive contract manufacturing. The greatest obstacles to the relocation of more value-added industries are the low level of education and training and the comparatively difficult investment conditions.

High hopes therefore rest on the reform of investment law adopted in October 2020 as part of the so-called Omnibus Law. Some implementing provisions are still missing, but the reform package is considered to be one of the most ambitious political projects of recent decades.

It remains to be seen to what extent the opening of previously closed areas for foreign investment, the relaxation of strict labor law, the relocation of decision-making powers from the provinces to Jakarta and the liberalization of strict environmental standards will actually attract substantially more foreign investment to Indonesia. BKPM has already reported some new settlements. However, it is sometimes difficult to judge whether these will really be realized or just remain political PR